Page 2: Types of organisation
There are several different types of organisation:
- The simplest way to start up a business is to be a sole trader. One person provides the funds, makes the decisions and keeps any profit. The owner is also the boss and controls the business. The main disadvantage is that the owner is also totally responsible for any debts and has unlimited liability for these debts.
- An alternative is to form a partnership. This involves between 2 and 20 people combining their finances and expertise. They run the business with joint powers and responsibility. They make decisions and share profits according to the legal terms of the partnership. The advantages are that the responsibilities are shared and more capital can be released to invest in the business. The owners can specialise in their area of expertise, improving the efficiency of the business. The disadvantages are that partners can disagree on important decisions and consulting all partners takes time. All partners have unlimited liability for debts and so selecting a partner needs to be done carefully. Many partnerships break up because the partners cannot agree.
If a business expands, it needs more capital. The opportunities for profit grow but so do the risks of failure. The solution to these challenges may be to form a company.
A company enjoys privileged status in law. It exists as a legal entity that can own property and be named in legal actions. It also enjoys the privilege of limited liability. This means that only the company's assets are at risk to settle debts, not the individuals employed by, or the investors in, the company.
- A private limited company (Ltd) involves a group of between 2 and 50 people supplying capital finance and sharing in the management of the organisation. This capital is divided into shares. These represent units of ownership units (for example £1 shares) that individuals in the company can hold. Shareholders elect directors to run the company according to their wishes. Shareholders hold voting power in the company's decision-making process depending on the number of shares they hold and receive profits in the same proportion in the form of dividends.
- Some enterprises outgrow this format and need access to much wider sources of share capital. This may mean becoming a public limited company (plc). This involves offering shares to the general public and to financial institutions. Shareholders enjoy voting rights on a 'one share, one vote' basis, so larger shareholders have more power. The directors employ professional managers to run the business. The company may retain profits or distribute it as dividends for each share held. The selling of shares in a private company needs the directors' approval. The shares in a plc can be bought and sold on the Stock Exchange where their value will rise or fall according to the performance of the market.
A mutual organisation is organised differently to this.